Tag Archives: Ability to Pay

There is a difference between Mortgage Pre-Qualification and Mortgage Pre-Approval. As a potential homebuyer it is important for you to understand the difference and know which one fits your specific need.

Pre-Qualification:A mortgage Pre-Qualification is an informal snapshot of your creditworthiness and how much you may be able to borrow. It’s simple process you can do over the phone or on-line. You’ll answer a few questions about your income, your long-term debts, your down payment and closing costs ability, etc. – Just to get a general idea of how much you can to spend on a new home. Pre-Qualifications not binding. There’s no guarantee that you will, in fact, get a loan for that amount.

Pre-Approval: A mortgage Pre-Approval is a formal commitment from your lender that they will lend you a specified amount of money, subject to an appraisal of the home you decide to buy.
To become Pre-Approved, you’ll need to provide documentation of your creditworthiness and ability to pay. A Mortgage Underwriterwill review and verify your documentation to determine how much the lender thinks you can afford to borrow and issue to you a formal Mortgage Commitment Letter. A Mortgage Loan Officer cannot issue you a formal Commitment letter.
By getting Pre-Approved for a mortgage before you start house hunting, you will be able to shop with confidence and show sellers you are qualified and serious about buying their home.

The DifferenceApplying for mortgage Pre-Qualification, or even better, Mortgage Pre-Approval are important first steps in the home buying/home financing process. However, know there is a difference between the two. As a potential homebuyer it is important for you to understand the difference and know which one fits your specific need.

Mortgage Underwriting is the process of verifying information about your employment, income, assets, debts, and credit history to determine if you can afford to pay back the mortgage loan you are applying for.Mortgage Underwriters also verify that the size of the mortgage you’re applying for is reasonable compared to the value of the property you’re buying or refinancing.Sound underwriting helps ensure that you qualify for a mortgage loan that you can afford to repay and it gives lenders the confidence to make mortgage money available to people who want to buy or refinance a home.

The Mortgage Underwriting process is basically divided into three parts:

1: Gathering and Verifying Your InformationYour lender, or your lender’s loan officer, collects and verifies your personal information, from your employment history to your outstanding debts.
You’ll be asked to give your lender permission to independently verify your information and obtain copies of your credit history.
Here’s a short list of the information you will need to begin underwriting your mortgage.♦ Employment: You’ll be asked to document your current employment status and provide your job history, including the length and terms of employment.♦ Income and Assets: Income is used to calculate the size of the mortgage you can responsibly afford and the size of the down payment you’ll need. Expect to provide proof of your primary income, such as copies of your W-2. You’ll also be asked to document other income sources and assets the underwriter may be able to use to evaluate your mortgage eligibility. Assets can include anything from bank accounts, retirement funds, investments and rental property, to your car.♦ Debts: A list of your current debts – such as credit cards, auto loans, student loans – is needed to calculate your debt-to-income ratio. Underwriters use this ratio to determine if your available income will enable you to continue paying your outstanding debts and a new mortgage payment.♦ Credit Report: Your credit report from independent credit bureaus(Experian, Equifax, and TransUnion) includes a record of your previous credit transactions … aka your credit history: plus a credit score based on proprietary formulas developed by the respective bureaus This information is used to help determine your creditworthiness and the likelihood that you’ll repay your mortgage.

2: Verifying Property InformationThe appraised value of the property is another critical factor for determining how much you can borrow. Your lender will have the property you hope to buy professionally appraised to assess its physical condition, the condition of the surrounding site and neighborhood, and its value.

3: Putting It All AltogetherFinally, the Mortgage Underwriter reviews all of your information, either manually or with the help of an automated underwriting system to determine
a.) your financial capacity to repay the mortgage, and
b.) whether or not the mortgage you’re applying for, and the house you hope to buy or refinance, meets your lender’s requirements

Follow this blog to learn more about how things work in the mortgage industry or visit My Home by Freddie MacSM for additional information.

When I first meet with a client, I always ask, “How comfortable do you feel paying a monthly housing obligation … including a mortgage payment, home insurance and mortgage insurance?” This is a different approach to the mortgage process and gets them talking in real numbers about their family finances. Typically, we wind up “backing” into the size of a house they can buy and the amount of a mortgage they can afford. I can’t remember when I’ve ever had an issue with a buyer’s “Ability to Pay.”

For everyone else, the Dodd-Frank Act created the Consumer Finance Protection Bureauwhich in turn created the proposed Qualified Mortgage. The CFPB’s QM regulations are meant to assure residential borrowers that their mortgage loan is right for them. Included in the regulations is the provision that the highest debt to income ratio on all mortgages is 43%. The 43% would be the total of the proposed housing expense, plus any, installment, credit card debts, alimony and/or child obligations as a percentage of the borrowers’ gross monthly income. Sounds like a good idea? … Right!

Now I am giving you a very simplistic overview here as there are many factors that affect a impact a families ability to pay. But, presently I am getting Conventional mortgages approved up to 45%: FHA and the USDA are insuring some loans with 49% to 55% ratios. These are very rough numbers, but you get the idea. What all this means is that many families will not be able to become homeowners or refinance when these regulations go into effect on January 14, 2014.

From everything I keep reading, there will be new players coming into the market to fill in the gap. This will be the new “Subprime Mortgage Market.” I can assure you, when private investors enter the market and cannot sell their loans through normal channels; it will cost the consumer much more money.

The Dodd-Frank Bill has created more jobs in Washington than any other government body to put these regulations together. I’m just not sure that it should be called the Consumer Financial Protection Bureau.